BAFL 45.66 Increased By ▲ 0.56 (1.24%)
BIPL 20.08 Decreased By ▼ -0.17 (-0.84%)
BOP 5.34 Decreased By ▼ -0.06 (-1.11%)
CNERGY 4.54 Increased By ▲ 0.01 (0.22%)
DFML 16.01 Increased By ▲ 0.33 (2.1%)
DGKC 78.62 Increased By ▲ 5.74 (7.88%)
FABL 27.80 Increased By ▲ 0.65 (2.39%)
FCCL 18.86 Increased By ▲ 1.21 (6.86%)
FFL 8.96 Decreased By ▼ -0.13 (-1.43%)
GGL 12.85 Increased By ▲ 0.21 (1.66%)
HBL 111.54 Increased By ▲ 0.88 (0.8%)
HUBC 122.23 Increased By ▲ 0.71 (0.58%)
HUMNL 7.69 Increased By ▲ 0.34 (4.63%)
KEL 3.29 Increased By ▲ 0.06 (1.86%)
LOTCHEM 27.80 Increased By ▲ 0.48 (1.76%)
MLCF 42.36 Increased By ▲ 3.03 (7.7%)
OGDC 110.37 Increased By ▲ 2.37 (2.19%)
PAEL 18.97 Increased By ▲ 1.41 (8.03%)
PIBTL 5.46 No Change ▼ 0.00 (0%)
PIOC 114.91 Increased By ▲ 6.91 (6.4%)
PPL 94.72 Increased By ▲ 2.97 (3.24%)
PRL 25.32 Increased By ▲ 0.44 (1.77%)
SILK 1.10 Increased By ▲ 0.02 (1.85%)
SNGP 64.32 Increased By ▲ 1.22 (1.93%)
SSGC 12.26 Increased By ▲ 0.37 (3.11%)
TELE 8.36 Increased By ▲ 0.17 (2.08%)
TPLP 13.35 Increased By ▲ 0.24 (1.83%)
TRG 83.84 Increased By ▲ 2.23 (2.73%)
UNITY 25.89 Increased By ▲ 0.14 (0.54%)
WTL 1.54 Increased By ▲ 0.02 (1.32%)
BR100 6,308 Increased By 126.6 (2.05%)
BR30 21,973 Increased By 434.1 (2.02%)
KSE100 61,691 Increased By 1160 (1.92%)
KSE30 20,555 Increased By 366.1 (1.81%)
Print Print 2023-01-30

EAG concerned at ‘inadequate’ SBP response

  • Economic Advisory Group stresses the need for meaningful reforms to achieve sustainable growth, instead of relying on policies that become a source of economic instability
Published January 30, 2023

ISLAMABAD: The Economic Advisory Group (EAG) has expressed serious concerns regarding the inadequate response from the State Bank of Pakistan (SBP) in pre-empting the ongoing crisis. Instead, the EAG argues, the SBP’s response, both in terms of setting the policy rate and interventions in the currency market – first through spending forex reserves and then through administrative measures – has only exacerbated the crisis.

EAG continues to stress the need for meaningful reforms to achieve sustainable growth, instead of relying on policies that become a source of economic instability.

The SBP has continued to maintain a significantly negative real interest rate during the fiscal year 2023. This was done despite the need to decrease the external financing gap to a more sustainable level. The real interest rate in Pakistan at the start of the fiscal year 2023 stood in the range of minus 5-7% on the forward-looking basis. This is particularly noteworthy, as it was in sharp contrast to the trend in the rest of the world.

Forex reserves plunge by about $1bn

Around the same time, according to the IMF October 2022 Financial Stability Report, the short-term median real interest rate on the forward-looking basis in Latin America had increased to 5%. Likewise, the median real rate for Asia and Central & Eastern Europe had increased to 1% and 3%, respectively. In contrast, according to Bloomberg, the real interest rate in Pakistan was the second lowest in the South East Asia region as of July 2022.

It is concerning that the SBP continues to remain behind the curve. The recent statements by the SBP Governor make clear that the SBP’s inflation projections underlying its decision to increase the policy rate by 100bps are flawed. The SBP Governor asserted that the true value of the exchange rate was close to Rs230 per US dollar. The sharp rupee depreciation in the following days puts a question mark on the credibility of the SBP’s decision making process behind the recent monetary policy decision.

Despite some concerns, the EAG had overall welcomed the 2021 legislation that granted greater autonomy to the SBP and adopted inflation targeting as the monetary policy regime. Unfortunately, the SBP has made no progress in achieving its stated objective of stabilising inflation around 5-7%. As per the SBP’s survey of forecasters, the long-term inflation expectations continue to remain unanchored at close to 9%. The implied inflation expectations based on long-term government bond yields are arguably even higher. This suggests that the SBP will continue to miss its inflation target over the medium term.

The SBP’s performance in ensuring financial stability is also unsatisfactory. As of 20th January 2023, the SBP reserves had declined to only $3.7bn. This decline in reserves can be traced back to September 2021. Since then, the SBP has used reserves to fund the gap between forex inflows and outflows, and in doing so, prevented the exchange rate from adjusting in response to market forces.

It is difficult to believe that during much of this period, policymakers at the SBP did not have information on the expected worsening in the global financial conditions, and the impending external debt servicing requirements in subsequent months. Yet, the SBP continued using reserves to bridge the financing gap, instead of using a combination of increasing the policy rate and resorting to a market-based exchange rate regime.

Economy: EAG underscores need for reforms

These policy decisions exacerbated the already precarious situation Pakistan faces today, due to the sharp increase in external debt servicing burden since 2013. The SBP Governor has stated that, excluding a $3bn rollover, Pak still needs to make a payment of $2.2bn under a bilateral-commercial arrangement, another $2.8bn which he did not clarify, and $1.1bn in interest payment during the next five months. With reserves already as low as $3.7bn, the debt servicing burden during the next fiscal year will present an even greater challenge.

The EAG recognises that there is a need for cooperation between the fiscal and monetary authorities to achieve desired macroeconomic objectives. However, the EAG is also of the view that the SBP has fallen short of using the autonomy that it was granted by the parliament to deliver on its mandate. In effect, by insisting on preventing the exchange rate from fully adjusting while not backing it with an appropriate interest rate stance, the SBP only contributed to the instability that it was mandated to prevent.

The transparency that comes with the adoption of a stated inflation target under the inflation targeting regime plays a crucial role in making the central bank accountable.

Copyright Business Recorder, 2023


Comments are closed.

Haroon Jan 30, 2023 07:25am
It's been all downhill since Reza Baqir made to leave
thumb_up Recommended (0)
Pl Jan 30, 2023 09:56am
If I am right ✅️
thumb_up Recommended (0)
Muhammad Nawaz Jan 30, 2023 10:53am
tek da ha
thumb_up Recommended (0)

EAG concerned at ‘inadequate’ SBP response

Israel's goal to destroy Hamas risks decade of war: Macron

Pakistan’s stance on climate finance for developing countries acknowledged in COP28: PM Kakar

Honour climate financing, PM asks developed world

Top development banks at COP28 vow to up climate game, quiet on fossil fuels

CJP’s office says he’s ‘fully cognizant of his constitutional duties’

Expenditures: Higher mark-up payments may put big pressure: MoF

India's ruling BJP leads in 3 of 4 state poll results

Kashmiri students arrested for celebrating India’s Cricket World Cup defeat get bail

BIT template issue settled: Crucial FTA with GCC finalised

David Warner included in settled Australia squad for first Pakistan Test